Don’t Buy Goldman, Says Citi

By Sam Mamudi

Associated Press

Feeling lucky?

It always strikes me as a little awkward when analysts at one bank downgrade a Wall Street rival, but that’s what happened late yesterday when Citigroup analyst Keith Horowitz issued a note pushing his rating for Goldman Sachs (GS) to Neutral.

That said, as far as downgrades go it’s about as mild as can be, and even includes an increased target price:

While we view GS as among the leading global capital markets franchises and expect mgmt to continue to take steps to recalibrate the business model to get to mid-teen returns and return excess capital to shareholders –- we see GS shares as nearing fair value given our ‘13-‘15 ROTE expectations of 11-12% and our long-term expectations of approximately 15%. Following better comp control coming out of 4Q results, we raise our target to $150 and downgrade shares to Neutral. Note our downgrade is largely a valuation call as our estimates are 6% and 3% ahead of 13/14 consensus.

Goldman’s shares are down about 0.4%, to $144.60, on a day when its bulge bracket peers are seeing gains of roughly 1%.

The issue, as Horowitz sees it, is that a bullish case for Goldman right now requires a bullish view of the broader economy:

The problem is to achieve the returns we believe are needed to push the stock meaningfully higher, the thesis shifts to a greater dependence on a cyclical upswing. Previously with the stock near or below tangible book, one could make the case for owning GS, arguing for improving profitability via cost cuts, balance sheet optimization, and modest capital returns. From current levels, however, a buy-thesis now requires greater confidence in a cyclical upswing in activity and implicitly assumes little incremental drag from new regulations – two items that are beyond management control.

So there you go — right now, a bet on Goldman is a bet on the US economy…and weak regulations.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.